Levi Strauss & Co. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks and six months ended May 29, 2022, compared with the periods ended May 30, 2021. This differs from the request metadata’s “2021 Q2.” Levi Strauss designs, markets and sells apparel globally through wholesale and direct-to-consumer channels, including Levi’s, Dockers and Beyond Yoga brands.
Financial performance and position
| Metric | Quarter ended May 29, 2022 | Six months ended May 29, 2022 |
|---|---|---|
| Revenue | $1.471 billion, up 15.3% reported and 19.7% constant currency | $3.063 billion, up 18.6% reported and 22.7% constant currency |
| Gross profit / margin | $855.0 million / 58.1% (58.8% prior year) | $1.799 billion / 58.7% (58.5% prior year) |
| Operating income / margin | $76.2 million / 5.2% ($106.5 million / 8.3% prior year) | $310.4 million / 10.1% ($283.6 million / 11.0% prior year) |
| Net income | $49.7 million, down from $64.7 million | $245.6 million, up from $207.2 million |
| Diluted EPS | $0.12, versus $0.16 | $0.61, versus $0.50 |
| Adjusted EBIT / margin (non-GAAP) | $145.4 million / 9.9%, versus $114.6 million / 9.0% | $383.2 million / 12.5%, versus $288.6 million / 11.2% |
- Quarterly revenue growth reflected stronger traffic and demand across segments, price increases and recovering store activity versus pandemic-affected comparisons. DTC was 38% of first-half revenue, up from 36%; wholesale was 62%, down from 64%.
- Quarterly GAAP operating income fell 28.5%, mainly because SG&A included $60.4 million of Russia-Ukraine-related charges. The charges reduced quarterly diluted EPS by approximately $0.15. Adjusted figures exclude specified items and are non-GAAP; they should be read alongside GAAP results.
- Quarterly gross margin declined 70 basis points, reflecting higher product costs and the absence of prior-year COVID-related inventory cost reductions; DTC mix, pricing, full-price sales and lower promotions partly offset these pressures. First-half gross margin increased 20 basis points.
- At May 29, cash and equivalents were $601.9 million and short-term investments were $96.4 million. Current assets were $2.642 billion versus current liabilities of $1.731 billion. Inventory was $1.113 billion, up from $898.0 million at fiscal year-end.
- Total debt was $1.004 billion, predominantly fixed-rate senior notes, plus $5.9 million of short-term borrowings. Net debt was $306.1 million and the reported leverage ratio was 1.1x. Revolving-credit availability was $837.4 million; reported total liquidity, including cash and short-term investments, was approximately $1.5 billion. The company reported compliance with debt covenants.
- First-half operating cash flow was $145.9 million, down from $248.0 million. Capital expenditures were $120.5 million, leaving adjusted free cash flow of $25.4 million under the company’s revised non-GAAP definition. Cash declined by $208.4 million during the period; financing outflows included $114.2 million of share repurchases and $79.5 million of dividends.
Changes, outlook and material items
- First-half revenue and net income increased year over year, but operating margin was lower. Comparisons were affected by the prior-year debt-refinancing loss ($30.3 million for the first half of 2021) and lower prior-year interest expense in the current period following refinancing.
- The Russia-Ukraine crisis led the company to suspend most commercial activity in Russia and Ukraine and close most company-operated Russian stores. Second-quarter charges totaled $60.4 million, including $35.4 million of store lease right-of-use asset impairment, $11.6 million of Russia goodwill impairment, $4.1 million of property and equipment impairment, and $9.3 million of other charges. Management said Russia and Ukraine operations were not material to the reported periods and did not expect significant disruption to the overall business, while noting ongoing uncertainty.
- COVID-related lockdowns in China and Hong Kong reduced quarterly revenue by an estimated $19 million in Asia. Supply-chain disruption prevented fulfillment of some orders, with an estimated $20 million quarterly revenue impact; freight, labor and distribution costs were also higher. The company received a $12.5 million German government subsidy in the first half for prior-year COVID-related losses.
- On June 1, 2022, management announced long-term targets of annual revenue growth of 6–8% and a 15% Adjusted EBIT margin by 2027. Plans include targeting DTC at 55% of annual revenue and tripling e-commerce by 2027. These are long-term goals, not near-term quarterly guidance; the filing does not provide a clear full-year fiscal 2022 earnings or revenue forecast.
- Management said it expected adequate liquidity over the next 12 months and longer term. Capital priorities include reinvestment, dividends, strategic acquisitions and share repurchases. After quarter-end, the board authorized a new share repurchase program of up to $750 million; it also declared a $0.12-per-share dividend. The existing $200 million repurchase plan had been completed.
- Key risks discussed include consumer spending and promotional pressures, inflation and supply costs, foreign exchange, COVID-related disruptions, geopolitical and sanctions uncertainty, competition, wholesale customer health, and potential future asset impairments. The company said ordinary-course litigation and customs matters were not expected to have a material effect; it reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended period: the filing is for Q2 and first half of fiscal 2022, not 2021.
- Track whether inventory growth converts to sales and cash, and whether operating cash flow recovers after the first-half working-capital outflow.
- Assess whether margin and earnings trends excluding Russia-related charges are sustainable, while considering that adjusted measures exclude real costs and are not GAAP.
- Monitor Russia-Ukraine and COVID-related disruption, including further impairments, China demand, and supply-chain fulfillment and freight costs.
- Compare progress against the 2027 growth and margin targets and evaluate the cash demands of the new buyback, dividends, capital spending and the planned German distribution facility.